Google Wallet and PayPal in electro-purse war

Google went live with its hotly anticipated Wallet application on Tuesday, though it will hardly hit the mass market yet – it runs only in the US, on the Sprint network, and on its own handset, the Nexus S. And eBay‘s PayPal – the firm which sued Google when it first unveiled Wallet in June – may be the more important player to watch as web majors fight to drive the mobile payments boom.

Google can now put its NFC-enabled service through its paces and gauge consumer enthusiasm, and is already promising that future releases will be broader, and far more significant.

Stephanie Tilenius, VP of commerce and payments at Google, said at a June press conference: "2011 and beyond will be the age of 'molo' – mobile local commerce. Wallet is one of the first steps, but this vision will take a while to come to fruition."

Future uses for the Wallet could include storing a driving licence, healthcare card, mass transit ticketing, hotel keycard or boarding pass. Support for other Android devices will follow before year end though timelines for international versions remain vague – even though NFC uptake is higher in some European and emerging markets than in the US.

Sales force

We think that mobile wallets could be disruptive in content too, when used in conjunction with persistent content stores, but that's not currently on anyone‘s radar as yet. In its first iteration, Google Wallet allows users to pay for goods by swiping their handset against a reader, with funds taken either from a Citi MasterCard or a Google Prepaid Card (which can be loaded from any other credit card).

Google will give customers a $10 bonus if they sign up for the prepaid card by the end of this year, as it looks to spur uptake of the Wallet and insert its brand and services into every link in the value chain. It also has deals lined up with Visa and American Express. Google announced 15 large stores which are supporting Wallet NFC readers, including RadioShack, American Eagle Outfitters, Subway, Macy's, Foot Locker and Walgreens. Other partners in creating a full-blown payments platform will include Verifone, Hypercom, Ingenico and Vivotech – whose security and processing technologies will contribute to a new point of sale system called SingleTap.

There are three aspects to the all-important security system: a PIN, which must be entered before making any purchase; a secure element within the device – a chip which stores encrypted credit-card data separately from the handset memory; and MasterCard's PayPass technology, which encrypts credit card details as they pass between the phone and NFC tag. Google's revenues will come from advertising and from revenue share from promotions such as coupons. It has also introduced Google Offers, a digital coupon service.

As for Sprint, the initial carrier partner appears just to be offering a conventional network access deal, but it will also include Google Wallet support in its own multi-vendor wallet. In the real world, it may also seek additional revenues from promotions. Fared Adib, VP of product development at Sprint, said that the cellco's role was to provide a "bridge" to handset vendors, in order to expand NFC availability.

Paypal's next move

PayPal, meanwhile, has shown how aggressively it would protect its markets from Google, whose rival Checkout has never gained the same presence in web payments as the eBay unit. When Google announced Wallet, its rival promptly filed a lawsuit alleging misappropriation of its trade secrets.

It claims that a former PayPal executive, Osama Bedier, stole confidential information about his employer‘s own mobile payment plans when he left to work at Google. While PayPal may be taking the well-trodden path of competing with Google by suing it, it also needs to ensure it broadens its own online payments system to become a full platform spanning mobile commerce.

Acquisitions will help PayPal build an end-to-end system

It has recently embarked on a string of acquisitions designed to achieve this end-to-end system, and last week it hosted an event for retailers to explain its strategy, as it tries to draw attention away from m-payments initiatives led by Google, credit card firms, or by carriers.

The latter group includes Isis, a joint venture of Verizon, AT&T and T-Mobile USA. PayPal president Scott Thompson said in a blog post that the aim was to provide a "one-stop shop for merchants to help them address every part of the shopping lifecycle".

That lifecycle would consist of demand generation (geo-targeted mobile advertising); in-store purchasing (barcodes and smart tags); local search and real time inventory checks; mobile and point of sale payments using NFC or other methods; and customer loyalty (virtual wallets and promotional activities like coupons). PayPal appears to have a long way to go to have a fully mobile payments system, but is very aggressive.

PayPal‘s specific contributions will form part of a broader ecommerce platform called X.Commerce, created by parent eBay on the back of a series of start-up purchases. These include Magento, Where, GSI, RedLaser, Fig Card and Milo, which have enabled eBay to move out of online-only transactions into real-world payments and location-aware services. With these acquisitions, the auction giant aims to emulate Visa and build a broad system that will span mobile, online, social and local payments. GSI is a digital ecommerce and marketing firm; RedLaser specialises in comparison shopping; Milo links customers to a local inventory of products; Where added a location-based advertising network plus a local deals service and guides; and Fig Card is a competitor to offline payments start-up Square.

eBay knows that its unit makes little revenue from its online stronghold or from peer-to-peer, but in real-world payments it could command transaction fees or even revenue shares from partners. To do so, though, it will need to demonstrate to merchants that it has advantages over more established partners. An important customer attraction will be to use carrier billing for buying physical goods, either by entering their phone number or using an NFC handset. This harnesses one of PayPal‘s recent acquisitions, of carrier billing specialist Zong. This capability is proven to be preferred by many customers when shopping in mobile app stores, and it would appeal to shoppers without credit cards. However, merchant fees are currently higher than for credit cards, which could be a deterrent.

In general, PayPal is highly focused on minimising the investment and disruption required by the merchant, supporting many new features via its mobile application – for instance, buying goods using PayPal Credit, which relies on eBay‘s BillMeLater system. While PayPal has a clear interest in NFC, it has not yet put the technology at the heart of its plan because it believes there will be a period when merchants are slow to adopt the required infrastructure – certainly until NFC devices are more commonplace, and consumer trust is proven.

NFC? We'll see how it goes...

Laura Chambers, senior director of PayPal Mobile, said in a recent interview that NFC was not the only technology in the evolution of payments, despite the excitement – and carrier support – around it. Chambers said: "There are a lot of technologies evolving around mobile payments, and NFC is just one of those. What we‘re doing is testing out NFC. We‘re getting it into the markets, we‘re getting it into the hands of consumers and we‘ll see how it goes."

As well as bypassing banks and card processors with its peer-to-peer approach, PayPal is avoiding, for now, the debate over NFC security mechanisms. Transactions use an encrypted token and do not access the secure element inside the NFC chip, where payment credentials are stored. This circumvents too much control by the device vendor or carrier; carriers are keen to have the upper hand in the NFC value chain and favor using the SIM card as the main authentication mechanism.

Recently, PayPal did introduce an NFC service for Android, based on its acquisition of Bump Technologies, but this only handles transfer of funds between two phone users, not at the point of sale. This echoes the surprising caution of Nokia when it enabled the NFC capability in its N900 smartphone, but for data exchange (by tapping two handsets together) rather than for payments.

Although Nokia was the earliest major vendor to put significant weight behind NFC, its activities are more focused on featurephones for emerging economies, targeting the "unbanked", as it is less convinced of mass demand (or device availability) in mature economies, at least in the short term.

A shortage of devices will be partly addressed by Google's weight driving the Android ecosystem, but in the meantime, Korean cellco SKT believes it has a way to accelerate NFC availability by retrofitting existing handsets. It has created the world‘s first SIM card with an embedded NFC chip, which could be swapped into any SIM-enabled phone, avoiding the need for NFC to be included on the phone‘s motherboard by the OEM.

The company plans to launch the product in October, initially for enterprise customers in Korea, but it is looking well beyond its own subscriber base and will offer the technology to operators worldwide. In particular, it will roll it out in China later this year to speed up the adoption of mobile payments and encourage merchants to invest in the necessary infrastructure, such as swipe readers. NFC operates on a 13.56MHz carrier over ranges of about 10 centimeters. SKT's NFC-on-USIM card comes embedded with a 13.56MHz antenna, NFC chip and USIM chip and an API will be published to third-party developers. However, some critics wondered whether cellphones not designed for NFC would be able to move or use the data arriving on the new USIM module, or whether some handsets would be capable of receiving and transmitting wirelessly through a SIM-borne antenna.

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